Character.AI Files for Chapter 11 Bankruptcy

Character.AI, which offers AI chatbot companions to users, has filed for bankruptcy and has agreed to sell certain assets to a Disney company.

The AI platform filed a voluntary petition for Chapter 11 bankruptcy on Oct. 12, listing an estimated $50 million to $100 million in assets and liabilities and between 100 and 199 creditors. The decision was taken to enable a “value-maximizing sale of all or substantially all” of the company’s assets, Character.AI said in an Oct. 12 statement.

In a court filing, the company’s CEO Colin M. Adams said the technology driving Character.AI was “expensive to operate.”

The company does not actually use the term “companion,” and describes itself this way on its website: “Character.AI empowers people to connect, learn, and tell stories through interactive entertainment. Millions of people visit Character.AI every month, using our technology to supercharge their imaginations.”

From January through August this year, the company incurred roughly $56.1 million in computing costs and approximately $19.7 million in personnel costs, which, combined, make up the majority of operating expenses. The business was running at an operating loss of around $8 million to $9 million per month as of August.

The company had taken action to lower operating expenses and boost revenues, but cash on hand continued to decline, the filing said.

In its statement, Character.AI said that before filing for bankruptcy, the company signed an agreement with Disney Worldwide Services Inc. The Disney affiliate will pay $20 million in exchange for certain intellectual property licenses and claims of the company.

Character.AI has also filed for a bid-based sales process, which is expected to be completed by late November or early December. The company clarified that it will continue operating the Character.AI platform during the sales process. However, if the sale process does not enable the platform to continue, it would be shut down, the company clarified.

“Over the past year, Character.ai has taken meaningful steps to sustain and improve its business in the face of significant legal, regulatory, and operational headwinds,” Adams said in the statement.

“After a comprehensive review of the available alternatives, the board determined that this court-supervised sale process provides the Company with the best opportunity to maximize value for all stakeholders.”

Character.AI has previously courted controversy over its impact on children. During a Senate hearing in September 2025, one parent said her autistic son developed homicidal thoughts and abusive behaviors after using Character.AI.

Earlier in 2024, a parent sued the company after her son took his life following prolonged use of the platform’s chatbot. In October 2025, the company announced it was blocking minors from accessing chatbots to keep teen users safe on the platform.

AI Market Concerns

Athanasios Vamvakidis, deputy director in the Monetary and Capital Markets Department at the International Monetary Fund (IMF), and Jason Wu, assistant director overseeing the IMF’s Global Markets Analysis division, warned in an Oct. 13 IMF blog post that global financial markets were facing increasing risks due to artificial intelligence.

While investments in semiconductors, data centers, and related infrastructure have contributed to economic activity, faltering profitability could lead to a correction in asset prices linked to the AI sector, the authors said.

Large data center operators are borrowing more, with the sector seeing circular financing arrangements in which equity and debt flows between different AI companies. Any stress at key AI companies could result in a decline in investment valuation, with the debts linked to these companies losing value as well.

A review of 14 such circular financing transactions since 2023 identified roughly $650 billion in debt and $300 billion in equity investments being made in exchange for $1.4 trillion in future revenue commitments, the authors said.

A May report from Goldman Sachs suggested that capital expenditures in AI could be between $4 trillion and $8 trillion over the next five years.

The massive investment in AI is a crucial driver of economic growth in the United States. JP Morgan Asset Management is predicting that AI-related companies will generate roughly a third of the total net income of the S&P 500 index this year.

The Federal Reserve Bank of Kansas City has also raised concerns about AI investments. In an Oct. 5 report, the bank said that AI companies have gone on a borrowing spree.

Optimism about AI has steeply pushed up asset valuations in financial markets. This has led to worries that elevated valuations could end up unwinding in a manner that leads to an economic fallout, the bank said.

The stock prices of tech companies engaged in AI research, such as Alphabet, which owns Google, and Meta, which owns Facebook, have risen this year. Alphabet opened the year at above $316 and was trading at around $354 as of 11:55 a.m. EDT on Tuesday. Meta, which opened at roughly $662, was trading at around $740.